Skip to main content

Oil Prices, Recession & CAD


Many oil market analysts have argued that a backwardated market is a bullish signal because it suggests tightness at the front end of the market. The other side of the debate (which is where we land) is that a backwardated market is one in which market players believe prices tomorrow will be weaker than they are today. The last time we were in a backwardated market was in late September/early October 2008 when prompt oil prices were trading between $90 and $100 per barrel. Three months later we touched a low of $32.40.

 Ok so the bread and butter of the CAD is oil prices -- specifically oil prices priced in the WTI (don't know why there is high correlation with that index -- and not Brent or West Coast...).  Barckwardation is an anomalous condition in physical commodities it can be caused by two distinct reason:  funny enough at either extreme of the economic cycle.  First high spot price are based on a view that supply is tight, in a rising demand environment (Economic growth) will lead to rising supplies (eventually) hence forward prices are lower.  The other argument is that future prices are lower because there is an expectation of demand collapse -- caused by recession.

ECRI's model assumes that America is on the verge of a recession (the last time they predicted a recession was in 2007) and they have an excellent track record.  The other reality is that with the Greeks, Portuguese, Irish, British, Spaniards and now Italians all cutting government spending, a recession is a given in Europe.  Governments account for a much larger percentage of GDP in Europe (in France, government expenditure accounts for 42% of GDP).  Italy and Spain are the only two economies that matter here with 12% and 8% of Europe total GDP -- a cut in their growth rate will be felt accross Europe.

News out of China are not good, everyone in the business is "praying" for a soft landing there, but it is hard to imagine how the Chinese government could orchestrate such an outcome, especially since inflation remains a stubbornly high!  A hard landing in China, a recession in Europe and America would spell doom for oil prices -- maybe not into the $40/bbl range but it could easily drop by 30% or 40%.  

Needless to say that a multiple recessions across the planet would have a negative impact on the CAD, on our exports would suffer (obviously).  





Comments

Post a Comment

Popular posts from this blog

Spray painting Taylor Swift G650 aircraft (updated)

 First, a bit of paint will not harm anyone.  These climate activities are going to learn two things in the next few days:  (1) Trespassing at an airport is a felony almost anywhere in the world.  That means criminal prosecution.   (2) removing paint from an aircraft is expensive.   So these climate activists are about to find out the reach of the British criminal system and it will not be pleasant, the UK has very strict laws about that, I would be surprised if cleaning the aircraft of all the paint will cost less than $100,000.     I am sure that when they planned (premeditation) this little show they had a very valid logic to doing this.  Tonight, they are probably realizing the depth of their troubles.   I understand that in the UK it's a minimum one-year jail sentence.    Also, good luck travelling with a criminal trespass charge against you.  I am relatively certain that the airline industry will ...
Post a Comment
Read more

Tariffs on inhabited Island

 Two seldom-visited islands, part of Australia, saw a massive increase in the tariffs they will face when exporting to the United States.   The 32,000 residents did not have much to say...being Penguines.   NO kidding, massive tariffs were imposed on Heard Island and McDonald Islands.  According to the Australian government, the last visitor to Heard was about a decade ago.   Never mind the 47% tariff on Madagascar, where the principal export is Vanilla and the GDP per capita is less than $500 a year. Not only a Stable Genus but evidently an administration that took all of two hours to proof the list of countries.    They also treated St Pierre & Miquelon, two islands part of France in the middle of the St Lawrence Gulf...
Post a Comment
Read more

Britain, France and Egypt

 The voters realize now that the Conservative Praty desire to return to 19th-century dominance has driven its hatred of the EU.  The voters realize now that departure from the EU has accelerated Britain's decline and may soon make it irrelevant.  At best it will have to kiss American arses to maintain its standing.  For this, the conservatives were punished.  The decline of Britain was inevitable, competition from Frankfurt and Germany in Finance was bound to grow.  The core of Europe (aka Germany) is aging quickly Macron seems to be winning his bet, the left alliance that won the legislative elections will not remain united for long, since they disagree on about everything.   The Far right though it was about to assume power is once again relegated to the back of the bus.   It may draw its own conclusions, but not all of these are good for France.  The far-right has won nearly 1/3rd of the electorate, that is not something to be ig...
Post a Comment
Read more